Los Angeles’ wildfires and an industry-tied insurance regulator may prove a tipping point for the country’s faltering financial safety net.
Many homeowners in the state have turned to an insurance program called the Fair Access to Insurance Requirements (FAIR) Plan. Created for people who can’t find insurance through the market and run by insurance companies under the commissioner’s oversight, FAIR Plan policies are often more expensive and provide less coverage than traditional plans. As private insurers fled California, the program swelled over 60 percent in the last year. It now has $450 billion in liabilities, though it only has about $385 million in funds to handle them.
The FAIR Plan’s vast liabilities are “a big gamble,” Victoria Roach, president of California’s insurer of last resort, told the state legislature last spring. The program, she warned, was just one major event away from insolvency.
“Are these wildfires that disaster?” asked Ben Keys, an economist and professor of real estate and finance at the Wharton School at the University of Pennsylvania. As L.A. continued to burn, the FAIR Plan had an estimated $5.85 billion worth of policies in the Pacific Palisades neighborhood decimated by the fires — an area that plan administrators considered among its top five exposures to wildfire risk anywhere in the state. Preliminary estimates of the insurance losses total over $10 billion — although Keys expects the total to be far higher.
Whatever happens to the country’s mortgage market, accurately pricing insurance may mean accepting that home values will decline as a result, Wharton’s Keys says. “The climate is just changing so much faster than policymakers are keeping up with,” Keys says, “and certainly than the pace at which the built environment can adapt.”
Though many people in California live in unprotectable areas, a property value collapse there would likely have substantial effects on a cornerstone of the U.S. economy.
“There are similar problems in Florida, Louisiana, coastal Carolinas,” Keys says, pointing to a December Senate report finding climate change is now driving a drop in insurance coverage nationwide, leading to higher prices.
